Asset Protection Planning

by Junita Jackson

Now that you are familiar with the most important asset protection and estate planning concepts how do you create the best plan? Protecting what you have from liability and preserving your estate for your family involves many new concepts for you and it’s not always easy deciding where to begin.

In this section, we will present a summary of the issues and options available-techniques to think about to frame the building of your overall plan. This is the approach we use with our clients to analyze their particular needs and to build an efficient program for asset protection, estate planning, and tax savings.

“Asset Protection and Estate Planning with the Family Savings Trust“

An increasingly popular tool used for asset protection and estate planning is known as The Family Savings Trust.  The term is broadly descriptive of a trust designed specifically to hold and protect a variety of assets against lawsuits and business risks.  It can be very flexible in form and allows for the accomplishment of most important asset protection and estate planning goals. 

“What is the Best Asset Protection Plan for Physicians?“

In our initial discussions with a client, these questions always come up “What’s the best asset protection plan?”  “Are there any plans which are completely bulletproof?”

Like any well-trained professional, I usually duck those kinds of direct and unconditional questions. After all, this is the legal system we’re talking about and when we compound the mixture of judges, jurors, and lawyers,  the results can be unexpected, to say the least.    Law is probably a lot like medicine in that respect.  So while we can’t honestly guarantee that the particular plan we design will produce the exact outcome we want, we do know what has happened before in similar situations.  If existing case law and legislation are clear and well developed then an asset protection plan that falls within the pre-set boundaries will have favorable and predictable results.

“Answers to Key Asset Protection Questions“

When I sit with clients to prepare or review their estate planning and asset protection goals a wide variety of questions and issues arise: What plan is most efficient? How are tax savings created?  How do we protect against the lawsuit and business risk?  Although I have addressed many these topics in detail in previous columns, here are a few starter questions which often arise and which may open the door for further thought and discussion. 

“Asset Protection: Needs Change Over Time“

The type of asset protection planning you need depends on where you are in your career. Because the amount and form of your investments and the particular risks you face will vary over time, your initial planning should be appropriately flexible and capable of adjusting to meet these changing needs. 

“When Is It Too Late For Asset Protection?”

One of the life’s ironies is that the worst time for asset protection planning is when you really feel like you need it the most. Although the law favors and encourages asset protection in most circumstances, there comes a point in financial transactions and legal proceedings when it is no longer permitted. In some cases, this boundary is clearly defined, but often the question of when the remedy of asset protection is still permissible is fuzzy. Experienced planners can follow several guidelines and make some educated guesses about where the line should be drawn in situations that physicians may encounter in their practice. 

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Beware Of Domestic Asset Protection Trusts

by Jason Kelley

The Domestic Asset Protection Trust ("DAPT") is an irrevocable trust that allows the settlor (or creator) of a trust to be a discretionary beneficiary.  While this trust has some advantages, it should not be used for Asset Protection as recent litigation has highlighted concerns about the DAPT, as it is often an inadequate entity to protect assets.  The DAPT is often referred to as a "self-settled trust" because the settlor is one of the beneficiaries.  Self-settled trusts allow the trustee to have the discretion of whether to make distributions to the settlor, while simultaneously protecting the assets from the settlor's creditors.The primary goal of the DAPT is to protect the assets of the settlor from their creditors.  The DAPT may also allow a settlor to transfer assets to a trust, preventing these assets from being included in the settlor's gross estate.

The major disadvantages of using the DAPT as a personal asset protector are as follows:

  • In creating a DAPT, you are more susceptible to litigation on your trust (fraudulent transfer claim) as Creditor's use this argument often to break through DAPT trusts to get to debtor assets.
  • The laws of the state where the DAPT is formed will not necessarily apply where the settlor, beneficiaries, or the trust's assets are not subject to the jurisdiction of the state.  In other words, a DAPT is only valid if the settlor and beneficiaries, as well as the trust assets, are all in the DAPT state.  Further, only twelve jurisdictions recognize the DAPT – so there is little uniformity across the United States.
  • State law pursuant to the Supremacy Clause of the US Constitution does not always bind federal courts.  Therefore, DAPT statutes may not protect the settlor against judgments in federal courts or by federal administrative agencies.
  • DAPT, as self-settled trusts, have a longer statute of limitations for creditors to sue on than most other Asset Protection Tools.

On the other hand, the limited liability company (LLC) and limited partnership (LP) are far more adequate entities for Asset Protection planning.

See more on these entities at the following links:

  • Limited liability companies
  • Limited partnerships

If you have any more questions regarding DAPT's or any other Asset Protection Planning tools, feel free to contact our Attorneys.

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Income Tax Liability In Bankruptcy For Appreciated Property

by Zach Haris

People avoid filing Chapter 7 bankruptcy if they have the nonexempt property with significant equity. Yet, consider a debtor who owns real estate that has appreciated and therefore has a built in liability for capital gain. If that debtor files bankruptcy could the IRS hold him personally liable after bankruptcy for the income tax liability associated with the gain on the property?

When a person files bankruptcy all of his property interest is transferred to the Chapter 7 trustee and the property constitutes the bankruptcy estate. The trustee acquires the debtor’s property with its tax characteristics including gain and character. The trustee controls the sale of the property, and the trustee receives the sales proceeds for the benefit of creditors.

The trustee and the bankruptcy estate is liable to pay the tax liability created by the sale of the debtor’s property. The tax is an administrative expense. The debtor is not liable for tax on the sale of property he had conveyed to the bankruptcy estate upon filing bankruptcy. A trustee may avoid tax liability by abandoning the property instead of selling it.

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Prenuptial Agreements Key Issue in Asset Protection

by Selina Stewart

 

One of the issues most likely to adversely affect your wealth is a simple statistic: nearly 50 percent of marriages end in divorce.
With the summer wedding season upon us, it’s time for a simple discussion of prenuptial agreements and why they must be part of every business owner, executive and physician’s risk-management plan.
I answer some of the most common client questions below:

Q: What is a prenuptial agreement or “Pre-nup”?

A: It is a legal agreement entered into between two people before they are married that that can cover a wide variety of issues centered on property rights and assets. In addition to the traditional role that most people think of (dictating the division and distribution of a variety of physical assets and setting terms for any required spousal maintenance at divorce), pre-nups can also cover death, incapacity, estate planning, and a variety of other legal issues including the division and attribution of income earned during marriage.

Q: Can I do it myself or with an online “kit”?

A: You can but you certainly should not. The laws regarding the requirements and enforceability of prenuptial agreements are specific, unforgiving, and vary widely from state to state. Further, some states actually require that each party has their own lawyer in place that they have reviewed the agreement with.

Q: What has to be in a pre-nup?

A. While the laws vary from state to state, these are the most common requirements:
1. Full and accurate disclosure of all assets by each party. Failure to disclose any assets can not only jeopardize the applicability of the pre-nup to that one asset, it can invalidate the entire agreement in the worst cases;

2. The agreement is done well in advance of the marriage and is free of any duress or eleventh-hour presentation that could have made someone feel forced to sign it under the threat of calling off the wedding;

3. Both parties have counselor at least had an opportunity to consult with counsel and were explicitly advised to do so.

Q: I’ve been married and divorced before; do I need a pre-nup for a later marriage?

A. Absolutely. The odds of a second marriage ending in divorce are over 60 percent and climb to 70 percent in a third marriage. Moreover, you will have less time to earn, save, and rebuild wealth than you did the first time around in a substantially more demanding medical business climate.
I routinely talk to doctors and other successful people who have had years of high income and who amassed significant wealth but didn’t investigate protecting it until they had already lost half or more of their hard earned net worth to a divorce. When I ask if they had a pre-nup the response nearly always the same, in fact alarmingly identical, “We didn’t have anything when we got married, we ended up successful and never thought it would happen to us…”
As an asset-protection attorney, I warn clients that there are several things I don’t protect them from. These include not paying taxes or other criminal acts and the person they are already married to, one of the life events that routinely costs people more than 50 percent of their net worth. I also routinely raise this issue with single clients of both sexes and advise them equally to get a pre-nup and to introduce the idea today if they are considering marriage.
I’ve seen too many people that went against the advice of their counsel lose or risk half a lifetime of work because they were afraid or unwilling to have a tough, serious conversation about the possibility of a divorce when they could still do something about it. I’ve also seen a substantial amount of emotional blackmail at play, most commonly the other party saying that it’s insulting, it’s not about money and the most ridiculous, “If you really loved me you wouldn’t ask me to sign this.” My response? If it is in fact not about money, you can sign it, this proves it. While these are certainly not the words of a relationship expert I need you to get your head around this: No one who you actually should marry will let this be a deal breaker.

 

 

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3 smart options for passing on your family business

by Selina Stewart

The baby boomer generation is full of entrepreneurs. Many have chosen a path of independence and cultivated successful businesses. As the generation matures many baby boomers are making decisions about the future of their companies. Deciding the best way to pass on a family business can be complicated. There are multiple choices to pick from and each one has its own repercussions. The following list does not include every possible option but highlights some popular choices.

1. Pass the business on as a gift

Some business owners prefer to give their company to heirs in the form of a gift. This option is complicated by state gift tax. Under federal law business owners can give up to $5.45 million before gift tax kicks in. Unfortunately, that number is the total amount of assets passed on to your heirs, which can include your house, stocks, and bonds. If the business is shared between you and your spouse then a married couple can give up to $10.9 million in total before taxes. This option is great for some small business owners but many choose another way to save money.

2. Leave business assets in trusts

Trusts are a great option for passing on a family business. You can transfer assets into a trust and also receive monthly income payments for a set amount of time. Once the owner has passed on the assets in the trust are transferred to beneficiaries. One of the major benefits of passing on a company through a trust is that it protects the successor's stake if they get divorced or sued.

3. Sell discounted shares

In this method, you can sell discounted shares to your heirs at a cheap and legal interest rate. It is basically borrowing your beneficiary money to buy an interest in the company. If your business makes up more than 35 percent of your adjusted gross estate then your kids can pay tax payments over 14 years - the first five years being interest-only payments. This can save you and your beneficiaries a lot of money.

Again these are just some of the most popular methods of passing on the family business to family. Each method has its own benefits and consequences. Due to the complications involved, it is advised that you seek the help of an attorney to create a business transition plan for your company.

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